Soaring currency worries force Denmark to act

AS IRELAND gradually returns to debt markets for the first time since its bailout and the European Central Bank cuts rates to stimulate growth, Denmark is resorting to radical moves to ground its soaring currency.

Denmark’s Nationalbank cut deposit rates into negative territory recently, an extraordinary move by the Scandinavian country which sees institutions forced to pay to deposit money with the central bank.

“It is an unusual case, but we are living in a world where the places you can store your money safely are a declining asset,” says Kasper Kirkegaard, senior currency strategist at Danske Bank in Copenhagen, “so there’s an increased demand for this. That shows up in the price.”

For the first time in its history, Denmark’s central bank cut the rate offered on certificates of deposit – the amount it charges banks to park money with the Nationalbank – below zero to minus 0.2 per cent. It also slashed its key lending rate to 0.2 per cent.

The moves, made in concert with cuts by the European Central Bank, highlight the stark contrast in challenges faced by European Union members as the economic crisis carries on.

Investors fleeing troubled euro zone countries are rushing into Denmark, driving the krone to its strongest level in nine years in March and putting pressure on the Danish central bank.

Like all Scandinavian countries, Denmark boasts strong public finances and a stable economy, but its policy of pegging the krone to the euro has made it particularly attractive in recent months.

Although Denmark voted against euro zone membership in 2000, its central bank policy is to keep the krone within 2.25 per cent of a central parity of 7.46038 to the euro. In practice, it has held the currency to an even tighter range.

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This strict mandate makes the Danish krone an attractive, low volatility choice, analysts say. Should the euro zone disintegrate and the peg break, many believe the Danish currency will soar, resulting in big gains for investors.

“It’s a limited bet on a break- up,” says Niels Christensen, chief currency strategist at Nordea in Copenhagen. “The hedge against one or more countries leaving the euro zone is increasing capital flows into Denmark.”

While Switzerland remains the better-known safe haven, investors have been increasingly drawn to the “Scandis”. In Sweden, more than 60 per cent of government bonds are now held by foreign investors, up from 40 per cent in 2008, while in Norway, almost 70 per cent of bonds are now foreign-owned, up from 50 per cent over the same period.

Meanwhile, foreign ownership of Danish bonds has pushed to 35 per cent from 25 per cent in 2008.

“If you look at all countries, there are only seven left with a triple-A rating and a stable outlook from all three major rating agencies,” says Kirkegaard. “Three of them are Norway, Sweden and Denmark. They all have fairly low debt levels and a fairly high current account surplus.“

Although the Swedish krona soared against the euro as the country powered out of the economic crisis, that pressure is expected to ease as the country’s heavy reliance on exports to the European Union weighs on growth.

Oil-rich Norway, on the other hand, has continued to demonstrate strength throughout the global downturn, with GDP growth of 4 per cent in the first quarter compared to the final three months of 2012.

Private consumption has remained strong and the economy is generally outperforming a vast majority of advanced economies.

Investor interest in Denmark grew particularly fierce toward the end of May and into early June, when concerns rose about the Greek election and a bailout of Spanish banks. The Danish central bank responded by cutting rates twice in May and intervening in foreign exchange markets.

Indeed, Denmark’s foreign currency reserves rose to a record high of 511.6 billion Danish kroner in June as the Nationalbank bought 7.3 billion kroner of other currency in a bid to stabilise the krone.

Things have settled since then, but another flare-up in the euro zone crisis will likely see investors pour more money into Denmark, analysts say.

“I think we’ll see another rush into Denmark and other Scandinavian countries as well because they’ve got very solid economies compared to Europe,“ says Tina Mortensen, an economist with Citigroup in London.

Should that occur, Denmark’s central bank will likely continue its pattern of first intervening in markets and then cutting rates even further, she adds.

A rising currency puts pressure on monetary policy and can cripple export industries by pushing up the cost of goods. Nevertheless, it has its advantages.

Indeed, while Ireland has dipped its toe back into debt markets and Spain relies on a promised bailout to keep its bond yields from unsustainable levels, Denmark recently managed to sell government debt at negative yields.

Kirkegaard says it is far easier to clip a soaring currency’s wings than to resuscitate a struggling one. “It’s a champagne problem. It’s easier as a central bank to keep your currency from appreciating than depreciating because to defend it from weakening, you might end up using your entire reserve.“

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